(Bloomberg) -- Chile’s consumer prices fell last month for the first time since June, giving the central bank only limited relief as it monitors inflationary threats including higher electricity tariffs and a weak currency.
Prices fell 0.2% in December, below all forecasts in a Bloomberg survey of analysts that had a median estimate of no change. Annual inflation accelerated to 4.5%, the national statistics institute reported on Wednesday.
Central bankers led by Rosanna Costa have cut borrowing costs by 6.25 percentage points since mid-2023 to the current level of 5%. Still, policymakers have signaled plans to pause easing as the peso trades near a record low, real wages increase and energy bills become more expensive again this month. The monetary authority sees inflation slowing to the 3% target only next year.
What Bloomberg Economics Says
“Above-target headline and core price gains still signal concern about the near-term outlook. Persistent services inflation, peso depreciation, higher electricity prices and increasing labor costs early in January add to the worries. The data support the less dovish outlook in the central bank’s quarterly report in December and our expectations for policymakers to pause their easing cycle.”
— Felipe Hernandez, Latin America economist
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The costs of both alcoholic beverages and clothing fell 1.3% on the month in December, the national statistics agency reported. Food and non-alcoholic beverages dropped by 0.9% during the period. Energy prices rose 0.7%.
While borrowing costs are expected to fall further, the future path for rates should consider short-term inflationary risks, central bankers wrote in minutes to their December policy meeting. Board members wrote caution will be needed when gathering information and determining the timing of new cuts.
Consumer prices will jump 0.8% on the month in January and policymakers will hold borrowing costs steady at 5% through at least April, according to a central bank survey of financial traders published later on Wednesday.
The peso has depreciated over 10% against the dollar in the past year amid global strength of the greenback. A weaker exchange rate fans inflation by making imports more expensive, and Chile’s small and open economy is particularly vulnerable because it obtains almost all of its fuels from abroad.
Regionally, other Latin American countries such as Brazil, Mexico and Colombia have also struggled to haul inflation back to their respective targets following a post-pandemic surge in consumer prices.
In Chile, central bankers had forecast annual inflation ending 2024 at 4.8%, according to estimates published in December. Costa has said factors including lackluster consumption will help slow price increases to the target.
“Headline inflation saw a sharp up-tick in December, primarily due to unfavorable base effects, but we now expect it to stabilize around 4.5% in the first half of the year before potentially declining to approximately 3.5% by year-end,” Andres Abadia, chief Latin America economist at Pantheon Macroeconomics, wrote in a note.
--With assistance from Giovanna Serafim.
(Updates with economist comments starting in fourth paragraph)
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